Menu
Tax Notes logo

Examining the Ukrainian Tax Implications of Russia’s Invasion

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: war and tax.

Since February 24, Russia's invasion of Ukraine has created Europe's largest refugee crisis since World War II, with more than 10 million people being forced to leave their homes and countless casualties among those who remained.

As of our recording today, April 20, the war is ongoing with Russian forces refocusing their efforts in the east of the country after failing to capture Kyiv and losing their Black Sea flagship. The Ukrainian people have mounted a fierce resistance to the invasion, and against long odds the government in Kyiv continues to operate and make tax policy.

Tax Notes reporter Sarah Paez will join us in a minute to tell us about her guest, who spoke about the tax changes made in response to the invasion and what the future might hold.

Later in the episode, we'll hear from Tax Notes International columnist Robert van Brederode discussing his article on the ethical aspects of tax law and compliance.

But first, Sarah, welcome back to the podcast.

Sarah Paez: Thanks. It's great to be back.

David D. Stewart: Now, I understand you recently spoke with someone about Ukraine's tax situation before and during the war. Could you tell us about your guest?

Sarah Paez: Sure. So, I spoke with Valeria Tarasenko. She's a tax advisor with Dentons, which is a multinational law firm with offices in Ukraine. So, prior to the war she was based in Kyiv, but has since relocated to Austria with her family to escape the fighting. Valeria has over 15 years of tax experience, advising Ukrainian companies on cross-border tax structuring and tax-saving solutions, tax dispute resolutions, and tax litigation and resolution of cross-border tax controversy.

David D. Stewart: So, what sort of topics did you talk about?

Sarah Paez: Well, we discussed some of the major changes to the Ukrainian tax system during the war, so that's including large reductions in the corporate income tax rate and VAT and excise taxes on fuel. Valeria also told me about a relatively new tax regime created by the Ukrainian government to encourage the success of the IT services sector in Ukraine. It's been a boon for the IT industry during a war in which most sectors have been hit very hard economically. Finally, we looked ahead at some of the pending and possible future tax changes that could influence Ukraine's post-war economy.

David D. Stewart: All right, let's go to that interview.

Sarah Paez: Hi, Valeria. Welcome to the Tax Notes Talk podcast. It's so great to have you here.

Valeria Tarasenko: Oh, thank you.

Sarah Paez: Yeah, so I just wanted to sort of lead in with the Russian invasion of Ukraine. Ukraine has been plunged into this war, so could you tell us a little bit about what the Ukrainian tax system has been like during wartime?

Valeria Tarasenko: Yes, you're right, unfortunately caused by the Russian invasion, it heated the Ukrainian economy a lot, and we have to adapt to function in wartime. And of course, our Ukrainian government made a lot of adjustments to organize and support Ukrainian business and try to introduce some tax system that would work both for the state and for the business. And nowadays we are not speaking about some profits, we are speaking about the survival of the business.

And the key message, which Ukrainian government addressed to all businesses and population that for them, the businesses have to maintain workplaces for Ukrainians and hopefully create new workplaces for Ukrainians which relocated from the eastern part to the Central Ukraine and Western Ukraine, where it's more or less safe to operate business.

Sarah Paez: Yeah. Well, with that, so what are some of the changes that Ukrainian businesses have seen specifically in their corporate income tax?

Valeria Tarasenko: Starting from the 1 April, Parliament adopted the law and according to which it's reduced 18 percent corporate income tax and the 20 percent VAT to only a single 2 percent tax, which is calculated based on the revenue the company had in the previous quarter. So, only one tax is left, it's a 2 percent revenue tax, which is obviously very low.

But it's totally voluntary, it's not that every business is obliged to transfer to this system. So, any business which feels that taxes will be low under this 2 percent single tax, they can voluntarily transfer to the payment of this single tax.

Other companies, if, for example, if it doesn't fit with their business operations, for example, their businesses have not been hurt by this war situation in Ukraine, they can continue paying regular taxes as is described during the regular time, not wartime. But according to statistics, I saw that a lot of Ukrainian companies, middle-sized and large businesses, have already transferred to the payment of this 2 percent revenue tax.

But the only disadvantage this 2 percent revenue tax has is the taxes have to be paid in advance. So, you are calculating this 2 percent tax based on the results of the previous month and pay tax in advance. If businesses can afford this, of course they transfer. If not, some businesses prefer to stay on the regular system.

Secondly, this system allows exemption from VAT, which make goods, supplies, and services provided by Ukrainian companies, or imported from outside, cheaper by 20 percent, because we have 20 percent VAT in Ukraine.

Plus, the reporting system is also very simplified, so it's a very simple procedure to submit tax returns and pay for the new taxes. It's basically to describe the transfer to this single, 2 percent revenue tax.

Sarah Paez: That's very comprehensive. And also it really sounds like the Ukrainian government is sort of giving this option to businesses in case they are really struggling.

So, I wanted to ask you a little bit more about excise taxes and how those might affect the import and export of goods during the war, and also VAT. So, the VAT on the import and supply of petroleum has been reduced from 20 percent to 7 percent. Can you talk a little bit more about that and what that's offered to the Ukrainian forces and also potentially Ukrainian households?

Valeria Tarasenko: Yes, actually it means a lot because I remember, within two weeks after the invasion started, prices of petroleum went up by 50 percent, which is a lot. It means that once prices to petroleum went up, it means that prices to other products will also go up because of logistics, everything depends on petroleum. And it was a right decision to cancel excise tax on import and supply of petroleum and petroleum-related goods, because such goods are subject to excise in Ukraine.

And plus, Parliament voted to reduce VAT on petroleum from 20 percent to 7 percent and prices on petroleum for retail customers, it dropped significantly. And of course, it also stopped prices on other goods, which are indirectly affected by their prices on petroleum in Ukraine, so it was absolutely the right decision.

I don't remember if I mentioned it or not, all these measures are temporary measures. It doesn't mean that these measures will continue after the end of the war, so it's just for the period of the war, when the government declared martial law status. Once martial law status is terminated or canceled, all these excise taxes and regular VAT rates will be applicable again.

Sarah Paez: So, I also wanted to ask, because you said these are temporary measures, of course, how is the Ukrainian government— with all these tax changes and specifically cutting taxes in a lot of situations — how are they ensuring the sustainability of public revenue, specifically during wartime?

Valeria Tarasenko: It's very hard to speak about sustainability in our situation. It's a matter of survival. And when the war started, the government actually declared that, "Business, if you can, please pay taxes in advance." And a lot of businesses did. They paid taxes in advance to support Ukraine, to support the state. But now when the economy is dropping, and I saw the reports from IMF (International Monetary Fund) that the Ukrainian GDP can shrink by 35 percent for 2022. So, of course it's very hard to speak about sustainability of public revenues, but still the government does their best to plan and to get some revenue from the taxpayers.

As I said, for businesses it's a key task to maintain workplaces for Ukrainian citizens. And unlike corporate tax, personal income tax was not changed or no tax benefit was provided for individuals or for their derived income. So, when Ukrainian citizens receive a salary, it will be still subject to 18 percent personal income tax, 1.5 percent military tax and social contributions. So, all those taxes will go to the state.

And secondly, how Ukrainian government tries to fill in the budget, is it managed to issue military bonds and it successfully sold the bonds to Ukrainians. And of course, it's financing from other states and from international institutions, such as IMF. So yes, we are lending. Unfortunately we have to lend money now.

Sarah Paez: You've said before that the Ukrainian government, and by extension the Ukrainian tax system, has kind of really been in survival mode during this time. Can you talk a little bit about what the tax administration has been doing? Have they suspended any of their regular scheduled actions? Are there things they're not doing?

Valeria Tarasenko: Yes, I would say that Ukrainian tax administration is now very user friendly. They terminated and canceled all tax audits and no tax audit is permitted now. And actually all their guidelines, how to apply these new tax benefits which have been introduced into the law, they are providing explanation how you have to apply, which is allowed, which is not. And I would say that they're friendly to customers, unlike it was before because their approach was always fiscal. It's first.

Secondly its temporary tax liability for violation of tax law, violation is not submission of compulsory tax returns, certain tax reporting in time or nonpayment of taxes in time because a tax payer didn't have the capacity to pay. Its penalties are not charged for these violations, but there is an obligation of within six months, to comply with the tax requirements after the extermination or expiration of the martial law status. So now no tax penalties are charged that apply to the taxpayer, which is also certain relief because in some regions, it was very hard to comply. Even filing a tax return was hard.

Sarah Paez: And what else has the tax administration done to make the war efforts easier? You talked a little bit about how the government's trying to shore up its coffers. What about in terms of donations to the war effort? What kinds of tax changes have you seen there?

Valeria Tarasenko: Yes, in every jurisdictions we have donation allowances. It's usually very small amounts. Parliament adopted the law, which allows both companies and Ukrainian citizens to deduct part of the donations, which they donated for Ukrainian humanitarian needs, to Ukrainian charity funds, or to the Ukrainian military forces. So, if you donate, you have to provide certain evidence, provide documents, evidence that you provided a donation. And a part of those amounts can be deducted upon tax reporting for 2022, which can be huge amounts in comparison to what was allowed before the war.

Sarah Paez: Now, many industries have suffered during the war, as you've said, but actually IT services seem to be doing fairly OK. Can you talk a little bit about how IT services are doing and what sorts of tax incentives the government has offered to them and particularly the Diia City Law?

Valeria Tarasenko: Yes. I think IT industry is the only industry which maybe in the long term will benefit from the situation because for IT specialists, you just need a laptop and that's all. You can relocate in any place, whether within Ukraine or outside Ukraine and continue working. Yes indeed, we had a very great initiative from our president [Volodymyr Zelenskyy], which came into force starting from the 1 January, 2022, with so-called Diia City Law, which provides a number of tax privileges and legal privileges to companies which are working in the IT sector.

I would first speak about the key tax benefit, which the Diia City Law provides. It provides very low taxes on incomes paid to employees or IT specialists engaged by IT companies. It's only 5 percent personal income tax, 1.5 percent military tax and very insignificant social contribution, which is around $55 per month, which is nothing. So, basically, effective tax rate for IT specialists working or engaged by IT companies is 6.5 percent, which is very, very low.

Yes, I think a lot of IT specialists worldwide would prefer to work and stay and to be a tax resident of Ukraine and pay such a low tax. But to be a resident, like a company, which can fall within this Diia City regulation, it has to be a pure Ukrainian company. So, it has to be a legal entity registered in Ukraine and its activities have to relate to IT activity.

There is a very extensive list of activities, which is big: IT can be computer programming, cyber security consulting, game development, design, etc. A lot, a lot. The list is really extensive of activities. There are a minimal number of requirements, but they are very do-able, like the minimum number of employees has to be not less than nine. Average salary per month, it has to be around €1,200, which is also very affordable.

Activities, as I said, have to be IT-related. 90 percent of revenue has to be received from IT business activity. Only 10 percent can be other types of activity like dividends, for example, like passive incomes or something like this. And the founders or beneficial owners cannot be from the jurisdictions listed in the blacklist, from sanction list jurisdictions or from Russia. That's all. And this regime is still very attractive because part of Ukraine is still more or less safe, especially the western part.

And a lot of Ukrainian IT specialists have been relocated to those areas and their companies also re-registered to those areas. And they still can apply this Diia City, a very favorable Diia City regime.

And yes, I see that I still have requests from some international IT companies or some multinational companies, but with large IT departments, to register a legal entity in Ukraine for IT purposes. And I see that a lot of job vacancies are open for IT sector as well, even now during the wartime, because of this very beneficial tax regime for the IT sector.

Sarah Paez: And do you know how many businesses have taken advantage of this law?

Valeria Tarasenko: I think every IT company operating in Ukraine has already registered before the war or tried to register now because as I said, it's very beneficial. It gives a lot of benefits to the IT sector in Ukraine.

Sarah Paez: I wanted to turn now to sort of a future look, and sometimes it's hard to sort of think about what the future could look like, but allow yourself to imagine. So, what tax legislation is expected in the postwar time? As you've said, many of these laws that you've gone over, they're going to expire once martial law ends. So, what's ahead for the post-war period?

Valeria Tarasenko: Yes, it's very hard to predict what changes will be, but I'm sure that after the war many changes will be introduced, it depends on the needs in Ukraine.

And firstly, we have to rebuild those areas which have been completely destroyed. We have to build new houses, new apartment buildings for those people who used to live in those regions. So, I'm sure there will be some special tax preferences for construction, for residential construction, for infrastructure projects. I'm sure that will be. There's no draft laws, but at least I see that a tax committee of the Ukrainian Parliament had discussions that we need to figure out some model which will allow Ukraine to rebuild as soon as possible the areas which were destroyed.

Secondly, we as a nation and as a state, they realize that this aggression from Russia will stay even when we sign a peaceful agreement, so we have to really invest into the development of our military industry. So, I also expect that there will be some special regulation, maybe special law for military industry, including some tax regulation for development of this sphere as well.

And one initiative, a draft of law which is already in the Parliament and under consideration, is about additional taxation of multinational companies which have both operations in Ukraine and still active operations in Russia. Companies which have not withdrawn from Russia. And they want to introduce a special tax, one at least now discussed, a 1.5 percent in addition to the corporate tax, ecology tax, property tax, these multinational subsidiaries bank in Ukraine.

I would say that this draft law is heavily criticized now because the criteria, it's not very clean and it can be interpreted in different ways. And subsidiaries of multinational companies which are operating in Ukraine, they're really like, "No, you have not voted for this law." But I think subject to discussion and some amendments, it will most likely be adopted within next month. So, it's this post-wartime tax legislation and tax developments I expect in the future.

Sarah Paez: Well, thank you so much, Valeria. That was a very interesting conversation and just gave a really great rundown of what's happening in Ukraine on the tax side.

Valeria Tarasenko: Thank you.

David D. Stewart: And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief, Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Sunita Doobay and Stanley Ruchelman explore the interplay of the revenue rule and the cum-ex cases. Sarah Hinchliffe and B. Anthony Billings review both the history and ongoing presence of the rule against perpetuities. In Tax Notes State, James Dawson, Jr. and Sonia Shaikh provide an overview and analysis of the new Maryland digital advertising tax. Billy Hamilton examines New Mexico's efforts to jumpstart hydrogen energy infrastructure. In Tax Notes International, four KPMG practitioners examine how companies can better use transfer pricing processes and technology to prepare for regulatory and reporting changes. Vadim Medvedev details war-related changes to Ukraine's tax regime in a letter to the editor. In Featured Analysis, Joe Thorndike praises Tax Day as a celebration of citizenship and fiscal-mindedness. On the Opinions page, the Tax Notes Commentary editors share the topics they hope to see covered this spring, like infrastructure, space and taxation, and critical tax theory.

And now, for a closer look at what's new and noteworthy in our magazines, here's Tax Notes Executive Editor for Commentary Jasper Smith.

Jasper Smith: Thanks, Paige. I'm here with Robert van Brederode, the founding partner of Brederode Tax. Welcome to the podcast, Robert.

Robert van Brederode: Oh, thank you for having me.

Jasper Smith: So, we're really excited to be working with you on a new column that you're writing for Tax Notes International titled "Tax Matters." So, can you tell us generally the type of topics that you have covered and that you'll be covering going forward in your column?

Robert van Brederode: Yeah, when I discussed with the editor of Tax Notes International [Cathleen Phillips], she particularly asked to do some value-added tax into this field I'm an expert in, so I will do that. I did one [column] already, or I submitted one at least, but I will pick a more philosophical approach to tax. I'm interested in that and several columns will go about that. And then I will take up things that just appear, a new court case that I think is important to discuss and I will do that.

Jasper Smith: Very nice, we look forward to that. So, we're here today to really discuss your most recent article, which is titled "Ethical Equilibrium in Taxation." So, can you give us just an overview of that article?

Robert van Brederode: Yes, actually. I did a book, Ethics and Taxation. I'm the contributing editor of that book that was published in January 2020, and I borrowed from there to write this column. I thought it was interesting to share the thoughts I had in both the introduction and the chapter I did in the book. Our idea is this: the basic idea is actually quite simple, is that there is a balance, an equilibrium, between our obligation to pay taxes and fairness of taxation.

It may surprise you, but most people will agree that we have a moral obligation to pay taxes since it's part of society and we have to pay for the cost of the government. I say, "Well that is true, but that it's balanced by the fairness of taxation." If a tax is not fair, then your obligation to pay it will become less as well.

And I don't know whether you remember that, I think it is in junior high school where you have this equilibrium test. They have a glass tube connected to other glass tubes at the bottom with a little tap. You can close and open that. If you fill the first tube to the top and keep the tap closed, of course it's full. But when you open the tap to the second tube, that tube will go up and the first one will go down and it will be at the same level, right? And if you do a third one, they'll be down in the other two, the third one goes up and it'll all be on the same level.

And my premise is basically that the same is true for the balance between the obligation to pay taxes and the fairness of taxes, and I extend that to the tax compliance and tax enforcement. So, there are four tubes, so to speak.

So, the idea is this: yes, you have to pay the taxes. But if a tax is unfair, then your obligation will become less, too. And most people will respond to unfair taxes by actually less compliance.

And then I put in tax enforcement. Tax enforcement is a necessary pillar because if people could just not pay taxes and get away with it, then of course tax morale will go down and other people will say, "Well then, I'm not paying either." You know how that is.

So, we need tax law enforcement, but tax law enforcement by itself should be ethical as well. You can, of course, go too far in tax enforcement and be unfair. So, I think that the IRS in the United States should deal with taxpayers fairly and be honest and straightforward, and then they can expect you to do the same thing and that would be reasonable. There are the four pillars, and that is the balance.

So, I think that's true. I started with an example: assume that we have a totally immoral tax law. I think to give the example of the tax law that basically says, "Well, let's have government going to kill old people to save on social security." So, we have a safe social security tax, that sounds great. But it actually means, just imagine when you're 85 years old, you get the nice box from the government with a ribbon around it and a pill in there and say, "Thank you for your service for 85 years, but we have to save social security, so this is the end of your trip." You wouldn't say, "Well, then, it's a journey," you would say, "Well, that is totally immoral."

Or you have a law that says, "We have to pay a tax so that funds forced abortions on women belonging to a minority that the government doesn't like." Just imagine. It sounds absurd. But you look at history, what kind of regimes have we had, those things could happen.

So, these are totally immoral tax laws, if you use tax to fund that. And I think you have not only the moral right actually, the moral obligation, to refuse to pay those, and that is of course simple.

If I say this, you will say, "I agree with that." Everybody agrees with that.

What do we do if a tax is fair? What does that mean? Does that mean you have to pay the maximum, if there is a maximum? You have to pay the minimum? Where is that? And that is an old question and a difficult one.

So, in the past we had in the United Kingdom, which is also a common law country, there was a case where they say, "We take form over substance. If it is allowed under the law, you can reduce your taxes to the very amount possible."

It was because they see taxes as appropriation of private property and why would you not be able to reduce that? And that view is still shared by many, but not by all. And you could say, "Well, that means you can go by any means to reduce your taxes." Is that going too far? And I think, yes, that disturbs the ethical balance a little bit and was also restored in the U.K. with the Ramsay case [W. T. Ramsay Ltd. v. Inland Revenue Commissioners, Eilbeck (Inspector of Taxes) v. Rawling] that came later.

And in the U.S., you could find in my statement, I offer rental homes, an associate justice in the Supreme Court saying, "Well, taxes are the price you pay for civilization, so you need to balance there what you can do." And so, I try to see in the article where that balance is, and I think actually it has been found. There is still a lot of pressure on companies and private individuals to pay more and do less tax planning, but tax planning is allowed to the extent that we don't know how much tax you have to pay.

Tax law is not really that particular, so tax planning is reasonable. Sometimes you have to because in the international context, you can have that you have to pay taxes in two states at the same time. And people say, "Well, that's not the idea of the tax law." Precisely!

So, you have to do some planning to make sure you only pay once. Whereas, if you plan to pay zero, you could say, "Well, now the ethical balance is disturbed by you because your planning is a bit too aggressive," so you have to find a balance.

I think we have to have a purposeful interpretation, as we see in common law countries like the U.S., Canada and the U.K. and Australia, but you also find it on continental Europe, where of course they have a civil law system. At the same approach, they look at what was the idea, the purpose of the law? Which some people call "the spirit of the law."

As long as you stay within the spirit of the law, you can do tax planning, so that gives you sort of a bandwidth. The minimum of the steps you have to pay, of course, it's the minimum prescribed by the law. The maximum is what is allowed according to the spirit of the law. That means that there is no fine red line to be drawn and say, "If you cross that, you're wrong." No, that red line will differ from situation to situation because everybody's facts are different and the law is not clear.

It's impossible to be clear, so yes, that would mean that you get more court cases sometimes where there is a dispute between the IRS and the taxpayer for that reason, but I'm trying to make the point that there is not an absolute fine red line that you cannot cross. It'll always be like this. And I think that's a good thing.

Jasper Smith: Yeah. It definitely sounds like you took a pretty comprehensive approach and these are issues that should be on the mind of anyone who's involved directly or indirectly, certainly in the tax arena or in the policy-making world. So, I look forward to reading that and I'm sure our listeners do as well. So, can we get you to tell us where they can find you online if they wanted to learn more about your work?

Robert van Brederode: Well, I'm on LinkedIn, so that's the easy way to find me. And it gives a few of my academic publications as well. The firm is brederodetax.com, so that is simple.

Jasper Smith: OK. Well, thank you so much, Robert. We appreciate you joining us today on the podcast.

Robert van Brederode: Oh, thank you for having me again.

Jasper Smith: And you can find Robert's article online at taxnotes.com, and please be sure to subscribe to our new YouTube channel, Tax Notes, for more in-depth discussions on what's new and noteworthy. Again, that's Tax Notes with an S. Back to you, Dave.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

Tax Analysts Inc. does not provide tax advice or tax preparation services. The information you have seen and heard today represents the views of the presenters, which may not be the same as those of Tax Analysts Inc. It may include information obtained from third parties, and Tax Analysts Inc. makes no warranties or representations of any kind, and is not responsible for any inaccuracies. Nothing in the podcast constitutes legal, accounting, or tax advice. The tax laws change frequently, and neither Tax Analysts Inc. nor the presenters, can guarantee that any information seen or heard is accurate. Also, due to changing tax laws, any information broadcast or downloaded after its original air date may no longer represent the current views of the presenters. If you have any specific questions about any legal or tax matter, you should always consult with your attorney or tax professional.

All content in this broadcast is protected under U.S. and international laws. Copyright © 2022 Tax Analysts Inc. Unauthorized recording, downloading, copying, retransmitting, or distributing of any part of the podcast is strictly prohibited. All rights reserved.

Copy RID